IMPACT OF DEMERGER ON SHAREHOLDERS WEALTH

RACHIT GOEL

ROAD MAP
INTRODUCTION REASONS FOR DEMERGER DECISIONS

PROCEDURE FOR DEMERGER

SCOPE OF STUDY CASE STUDY CONCLUSION

INTRODUCTION
Demergers were an American invention of the 1920s and became common since the 1950s Demerger has not been defined in the Companies Act, 1956

Demerger has been defined under-Section 2(19AA) of the Income Tax Act 1961

REASONS FOR DEMERGER DECISIONS

a. Dismantling of conglomerates b. Organizational improvements c. Capital market improvements d. Corporate Governance improvements

e. Bondholder expropriation

PROCEDURE FOR DEMERGER

Demerger forms part of the scheme of arrangement or compromise within the ambit of Section 390, 391, 392, 393, 394 besides Sec 394A

Demerger is carried on under the scheme of arrangement with approval of the court

SCOPE OF STUDY
To study is confined to those companies which filed their Scheme of Demerger with Registrar of Companies during the calendar year 2006

OBJECTIVE OF STUDY
To study the impact of demerger on the shareholders wealth with special reference to companies that demerged in India during the calendar year 2006

HYPOTHESIS OF THE STUDY

The null hypothesis considered for the study

SAMPLE UNIT
The companies going for the demerger have been considered as sample unit for the study.

SAMPLE SIZE
5 companies were taken as the sample for the study on the random sampling basis

ANALYSIS DESIGN
1. The proportion of allocation of the shares in the resulting company in accordance with the number of shares held by members in the parent company (Pre-demerger state) 2. The average pre-demerger share price has been taken as the average of the share price for six months immediately preceding the eligibility date 3. The average post-demerger share price of the demerged company has been taken as the average of the share price of the demerged company for six months or till 31st July 2007 whichever of the two is earlier, immediately succeeding the eligibility date

ASSUMPTIONS OF THE STUDY

In the present study, a hypothetical case of a shareholder holding 100 shares in each of the demerging companies has been considered

CASE-1 TELEVISION EIGHTEEN INDIA LIMITED

Demerged Company : Television Eighteen India Limited

Resulting Company : Network 18 Fincap Limited Effective Date : 27th September 2006

Eligibility Date : 24th November 2006

Scheme of Demerger

Table-1A
Company Equity Average pre-demerger Shareholders Shares Share Price Wealth 100 Rs. 616.61 Rs. 61661.00

Television Eighteen India Limited

Pre-Demerger: Shareholders Wealth in Television Eighteen India Limited

Table-1B
Company Television India Limited Network Limited 18 Equity Shares Eighteen 140 Average post-demerger Shareholders Share Price Wealth Rs. 639.20 Rs. 89488.00

Fincap 120

Rs. 432.97

Rs. 51956.40

Total Shareholders Wealth After Demerger

Rs. 141444.40

Post-Demerger: Shareholders Wealth in Television Eighteen India Limited

CASE-2: GREAT EASTERN SHIPPING COMPANY LIMITED

Demerged Company : Great Eastern Shipping Company Limited Resulting Company : Great Offshore Limited Effective Date : 16th October, 2006 Eligibility Date : 8th November 2006 Scheme of Demerger

Table 1A
Equity Shares Average pre-demerger Share Price Rs. 256.36 Shareholders Wealth Rs. 25636.00

Company

Great Eastern Shipping 100 Company Limited

Pre-Demerger: Shareholders Wealth in Great Eastern Shipping Company Limited

Table-2B

Company

Equity Shares

Average post-demerger Share Price Rs. 209.41 Rs. 703.81

Shareholders Wealth Rs. 16752.50 Rs. 14076.50 Rs. 30829.00

Great Eastern Shipping 80 Company Limited Great Offshore Ltd 20

Total Shareholders Wealth After Demerger

Post-Demerger: Shareholders Wealth in Great Eastern Shipping Company Limited

CASE-3: ZEE ENTERTAINMENT ENTERPRISE LIMITED

Demerged Company : Zee Entertainment Enterprise Limited Resulting Company : Zee News Limited : Wire and Wireless India Limited Effective Date : 22nd November 2006 Eligibility Date : 16th December 2006 Scheme of Demerger

Table- 3A

Company

Equity Shares

Average pre-demerger Share Price Rs. 291.72

Shareholders Wealth Rs. 29172.00

Zee Entertainment 100 Enterprise Limited

Pre-Demerger: Shareholders Wealth in Zee Entertainment Enterprise Limited

Table 3B
Company Equity Average post-demerger Shares Share Price Zee Entertainment 100 Rs. 277.09 Enterprise Limited Wire and Wireless India 50 Rs. 89.11 Limited Zee News Limited 45 Rs. 40.32 Total Shareholders Wealth After Demerger Shareholders Wealth Rs. 27709.00
Rs. 4455.50 Rs. 1814.40 Rs. 33978.90

Pre-Demerger: Shareholders Wealth in Zee Entertainment Enterprise Limited

CASE-4: CAMLIN LIMITED

Demerged Company : Camlin Limited

Resulting Company : Camlin Fine Chemical Limited

Effective Date : 17th December 2006

Eligibility Date : 19th February 2007 Scheme of Demerger

Table-4A

Company

Equity Shares

Average pre-demerger Shareholders Share Price Wealth

Camlin Limited

100

Rs. 186.91

Rs. 18691.00

Pre-Demerger: Shareholders Wealth in Camlin Limited

Table- 4B
Equity Average post-demerger Shareholders Shares Share Price Wealth Camlin Limited 100 Rs. 135.09 Rs. 13509.00 Camlin Fine Chemicals 100 Rs. 53.95 Rs. 5395.00 Limited Total Shareholders Wealth After Demerger Rs. 18905.00

Company

Post-Demerger: Shareholders Wealth in Camlin Limited

CASE-5: INDIABULLS FINANCIAL SERVICES LIMITED

Demerged Company : Indiabulls Financial Services Limited Resulting Company : Indiabulls Real Estate Limited

Effective Date
Eligibility Date

: 20th December 2006

: 29th December 2006

Scheme of Demerger

Table- 5A

Company
Indiabulls Financial Services Limited

Equity Shares 100

Average pre-demerger Shareholders Share Price Wealth Rs. 395.49 Rs. 39549.00

Pre-Demerger: Shareholders Wealth in Indiabulls Financial Service Limited

Table- 5B
Company
Equity Average post-demerger Shareholders Shares Share Price Wealth 100 Rs. 450.91 Rs. 45091.00

Indiabulls Financial Service Limited Indiabulls Real 100 Rs. 382.25 Estate Limited Total Shareholders Wealth After Demerger

Rs. 38225.00

Rs. 83316.00

Post-Demerger: Shareholders Wealth in Indiabulls Financial Service Limited

CONCLUSION
Shareholders wealth has been appreciated corresponding to demerger

Excluding Camlin Limited

LIMITATIONS OF THE STUDY

1. Difficulty in abstracting data 2. Time period considered for the study can be considered one of the limitations of the study 3. Size of the samples considered can also be considered as one the limitations of the study 4. This project has been done in bullish market and thus, result may be differing in a bearish market

SCOPE OF FUTURE RESEARCH

1. Study can be done where mergers and demergers have taken place simultaneously in a company 2. Study can be done using more samples and also from different years 3. Study can be done on price fluctuation and various decisions taken by the company on demerger

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